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Why Labcorp Holdings Stock Dropped Today
Key Points
Medicare and Medicaid have been overpaying Labcorp for years, says the government.
Starting next year, they plan to cut reimbursement of lab testing by 15%.
And they might keep cutting rates for two more years.
Medical testing giant Labcorp Holdings (NYSE: LH) stock slipped 3.3% through 11:05 a.m. Tuesday, after the Centers for Medicare & Medicaid Services (CMS) disclosed Monday that they've been paying about 16% more for lab work than private insurers pay.
No longer.
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Effective Jan. 1, 2027, CMS says it will cut reimbursement rates for lab costs by up to 15%.
Image source: Getty Images.
What this means for Labcorp (and for you)
CMS estimates the reduced reimbursement rates will save taxpayers $1 billion per year. Unfortunately for Labcorp, though, these savings will come directly out of its own revenue stream.
In its latest 10-K filing with the SEC, Labcorp highlighted a reduction in the rates it receives from Medicare and Medicaid as one key risk to investing in Labcorp stock, warning that "its revenues, profitability, and cash flows may be materially impacted" by such an action by CMS. The question is: how badly might Labcorp be hurt?
And the answer: According to this same 10-K filing, Labcorp got approximately 8% of its revenue from CMS reimbursement in 2025.
What's next for Labcorp?
And now we can do a little math. A 15% reduction to an 8% revenue stream implies that if CMS reduces its rates by the full 15%, Labcorp's annual revenue would decrease by 1.2%. Now, Labcorp notes that successive 15% per year reductions are possible from 2027 through 2029. This still implies that the worst-case scenario for Labcorp is about a 3.6% reduction in its business.
With Labcorp stock down 3.3%, that worst-case scenario has been just about priced into the stock today. From where I sit, that means there's little reason to expect Labcorp stock to keep going down after today.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.